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Facts
The assessee, a cooperative bank, paid interest on fixed deposits to other cooperative societies. The Assessing Officer treated the assessee in default for not deducting TDS on these payments. The CIT(A) upheld the AO's order, holding that the assessee was not eligible for exemption under Section 194A(3)(v) of the Income Tax Act as it was a cooperative bank.
Held
The Tribunal held that the second limb of Section 194A(3)(v) provides exemption for payments made by a cooperative society to another cooperative society, provided the payer's gross turnover does not exceed Rs. 50 crores. The Tribunal restored the matter to the AO to verify the assessee's turnover for the relevant financial year.
Key Issues
Whether a cooperative bank is liable to deduct TDS on interest payments made to other cooperative societies, considering the provisions of Section 194A(3)(v) and the turnover threshold.
Sections Cited
194A, 201(1), 201(1A), 80P, 145(A)(3)(i), 194A(3)(v), 194A(3)(iii)(a), 194A(3)(viia)
AI-generated summary — verify with the full judgment below
These appeals by the assessee are directed against separate orders, all dated 12.02.2025, passed by the Ld. Additional/Joint Commissioner of Income-tax (Appeals) – 3 Bengaluru [in short ‘the Ld. CIT(A)’] for assessment year 2016-17, in relation to tax liability raised for non deduction tax at source (TDS) on interest payments, raised by the ld Assessing Officer on various branches of the assessee. As common issue-in-dispute is involved in all these appeals, therefore same were heard together and disposed off by way of this consolidated order for sake of convenience.
Identical grounds have been raised in all these appeals and therefore as per consent of parties, the is taken as lead case for adjudication, the grounds of which are reproduced as under: “1. In the facts and circumstances of the case, the lower authorities have erred in law as well as in fact treating assessee in default in respect of alleged non-deduction of tax from interest paid to co-operative societies u/s 194A of the Income Tax Act 1961.
2. Without prejudice to Ground No 1 above, the lower authorities have erred in law as well as in fact that interest received by co-operative societies is deductible u/s 80P of the Act, therefore, the requirement of TDS u/s 194A is redundant hence TDS applicability u/s 194A is infructuous. The appellant craves leave to add, alter, omit or substitute any of the grounds at the time of hearing of the appeal.”
Abhyudaya Co-operative Bank Ltd Dahisar Branch 3 & 1811/MUM/2025
Briefly stated facts of the case are that the assessee is a cooperative society registered under the Multi-State Cooperative Societies Act,2002 and was engaged in carrying business of banking. The Assessing Officer (TDS), Mumbai conducted TDS survey at various branches of the assessee including the branch in present appeal to verify applicability of the TDS provisions. During the course of the verification, the assessing officer noticed that the assessee had not deducted tax on ‘interest’ payment made on fixed deposit held to cooperative societies and other persons. The ld. Assessing officer according initiated the proceeding under the provision of section 201(1)/201(1A) of the Income Tax Act, 1961 (in short ‘the Act’). In response, the assessee submitted that income credited by or paid by a cooperative society to a member thereof would not be covered under the provision of section 194A(3)(v) of the Act. The Assessing Officer was not satisfied with the submission of the assessee and accordingly he treated the assessee has assessee-in-default in respect of interest payment amounting to Rs.6,16,733/-, a list of which has been reproduced by the assessing officer in paragraph 7 of the impugned order u/s 201(1)/201(1A) of the Act. The demand computed by the assessee is reproduced as under: “In view of the above, the total demand on account of TDS default is computed as under: Particulars Amount(Rs.) TDS default amount u/s 201(1) on 6,16,733
Abhyudaya Co-operative Bank Ltd Dahisar Branch 4 & 1811/MUM/2025 account of Non-deduction and short deduction Interest u/s 201(1A)@1% as per table 4,93,386 above Total Amt. u/s 201(1)/201(1A) 11,10,119 ”
Aggrieved, the assessee filed appeal before the Ld. CIT(A) and filed detailed submission claiming that assessee is primarily a cooperative society and therefore in view of the provision of section 194A(3) any income credited or paid by a cooperative society to any other cooperative society is not liable for deduction of tax at source. Ld. CIT(A) however referred to provisions of the Banking regulation Act, section 80P of the Act and Reserve Bank of India Act etc and concluded that assessee is an ‘urban multistate commercial bank’ and therefore the assessee was not entitled to the benefit of section 145(A)(3)(i) and sec. 194(3)(v) of the Act. The relevant finding of the Ld. CIT(A) is reproduced for ready reference as under: “5.1.42 Abhyudaya Co-Operative Bank Limited is an Urban Multi- state Co-operative Bank based in Maharashtra and is in operation since 1965. It has been conferred with the status of Scheduled Bank by the Reserve Bank of India in 1981. It is working under the supervision of RBI and has received licence under Section 22 of Banking Regulation Act, 1949 in order to function as a bank. The fact that Abhyudaya Co-Operative Bank Limited is completely under the control and supervision of RBI. An Urban Multi-State Co- operative Bank is essentially a Primary Co-operative Bank and therefore they are to be considered at par with commercial bank as the RBI regulates and supervises the banking function of UCBs under the provision of Banking Regulation Act, 1949. Thus, Abhyudaya Co-Operative Bank Limited is at par with the commercial banks and not eligible to claim any benefit under section 80P of the Act and consequently it also cannot avail the benefit under section 194A(3)(i) and section 194A(3)(v) of the Act.
Abhyudaya Co-operative Bank Ltd Dahisar Branch 5 & 1811/MUM/2025
5.1.43 The Appellant also does not get any exemption under section 194A(3)(iii)(a) of the Income tax Act, 1961 as the said section provides exemption from TDS deduction only if income is credited or paid to any banking company to which the Banking Regulation Act, 1949 applies or any cooperative society carrying on the business of banking including a cooperative land mortgage bank. In the instant case, the Appellant has made interest payment to Cooperative Societies which are either Housing Cooperative Societies or such Cooperative Societies which are not in the business of banking. These Societies are neither banking companies to which the Banking Regulation Act applies nor are they cooperative societies engaged in the business of banking. Therefore, the Appellant was liable to deduct TDS on interest payments made to such cooperative societies. 5.1.44 The Appellant has further relied on CIRCULAR NO.- 19 /2015 F. No. 142/14/2015-TPL Dated, 27th November, 2015 on para 42.7 as under: "42.7 Further, the existing exemption provided under section 194A(3)(v) of the Income-tax Act from deduction of tax from interest paid by a co-operative society to another co-operative society shall continue to apply to the co-operative bank and, therefore, a co-operative bank shall not be required to deduct tax from the payment of interest on time deposit to a depositor, being a co-operative society." In this regard it is stated that as per the same circular at Para 42.5 it is stated as under: "In view of this, the provisions of the section 194A(3) (v) of the Income-tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a co-operative society under section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. As this amendment is effective from the prospective date of 1st June, 2015, the co- operative bank shall be required to deduct tax from the payment of interest on time deposits of its members, on or after the 1st June, 2015. Hence, a cooperative bank was not required to deduct tax from the payment of interest on time
Abhyudaya Co-operative Bank Ltd Dahisar Branch 6 & 1811/MUM/2025 deposits of its members paid or credited before 1st June, 2015. Thus, A.Y 2016-17 onwards, the Cooperative Banks have been mandated to deduct TDS on interest payments made to cooperative societies. Further, the Appellant's reliance on amendment in Section 194A w.e.f 01.04.2020 is only with respect to cooperative societies and not Cooperative Banks. In addition to this Section 194A of the Income Tax Act, 1961 was again amended by Finance Act, 2020 where a proviso was inserted by the Act No. 12 of 2020, w.e.f. 1-4-2020 and the same is provided below: As has been mentioned in the preceding paras, the Appellant is a Cooperative Bank and not a Cooperative Society and therefore the abovementioned amendment does not cover it. 5.1.45 In view of the facts mentioned above, the Appellate authority does not find any discrepancy in the order under section 201(1)/201(1A) of the IT Act passed on 29/12/2022, no adverse interference is drawn. The Appeal filed on this ground is dismissed.”
We have head rival submission of the parties and perused the relevant material on record. Ld. counsel for the assessee brought our attention to the provision of sec. 194A(3)(v) for ready reference said provision is reproduce as under: “Section 194A(1) in The Income Tax Act, 1961 (1)Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed[one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such interest is Abhyudaya Co-operative Bank Ltd Dahisar Branch 7 & 1811/MUM/2025
credited or paid, shall be liable to deduct income-tax under this section. Explanation.—For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.” ………………………… (3)The provisions of sub-section (1) shall not apply— (i) ………………………….. (ii)[***] (iii) ………………… (iv) ………………… (v)to such income credited or paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co- operative society; Explanation.—For the purposes of this clause, "co-operative bank" shall have the same meaning as assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949); (vi)…………………………. (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1st day of July, 1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); (viia) to such income credited or paid in respect of,— (a)deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co- operative land development bank; (b)deposits (other than time deposits made on or after the 1st day of July, 1995) with a co-operative society, other than a co-operative society or bank referred to in sub- clause (a), engaged in carrying on the business of banking; (viii)…………………………….. (ix)………………………………….. (ixa)………................................... (x) ……….................................... (xi) ………………………………….
Abhyudaya Co-operative Bank Ltd Dahisar Branch 8 & 1811/MUM/2025
[Provided that a co-operative society referred to in clause (v) or clause (viia) shall be liable to deduct income-tax in accordance with the provisions of sub-section (1), if— (a)the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in sub-section (1) is credited or paid; and (b)the amount of interest, or the aggregate of the amounts of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than fifty thousand rupees in case of payee being a senior citizen and forty thousand rupees in any other case.] Explanation 1.—For the purposes of clauses (i), (vii) and (viia), "time deposits" means deposits (including recurring deposits) repayable on the expiry of fixed periods. [Explanation 2.—For the purposes of this sub-section, "senior citizen" means an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year.]”
Upon a plain and harmonious reading of the provisions contained in Section 194A(3)(v) of the Act, it is evident that the said clause is bifurcated into two distinct limbs. The first limb carves out an exemption from the obligation of tax deduction at source in respect of interest income credited or paid by a co-operative society, other than a co-operative bank, to its members. This provision, in categorical terms, excludes co-operative banks from the purview of such exemption.
6.1 However, the second limb of the provision deals with exemption from TDS in cases where interest income is credited or paid by a co-operative society to any other co-operative society. Notably, this part of the provision does not contain any exclusion
Abhyudaya Co-operative Bank Ltd Dahisar Branch 9 & 1811/MUM/2025 for co-operative banks. Accordingly, where a co-operative society makes payment or credits interest to another co-operative society, such transaction is exempt from the requirement of tax deduction at source, subject, however, to the condition stipulated in the proviso to sub-section (3) of Section 194A, namely, that the aggregate gross receipts or turnover of the payer co-operative society during the previous financial year does not exceed Rs. 50 crores.
6.2 Turning to the facts of the present case, it emerges that the assessee is a co-operative society which has effected payment of interest to other co-operative housing societies, who also qualify as co-operative societies under the Act. Having regard to the statutory framework delineated above, it is clear that the assessee, in the event its gross turnover during the relevant financial year does not exceed Rs. 50 crores, is not liable to deduct tax at source on such interest payments under Section 194A(3)(v).
6.3 In light of the aforesaid legal position, we deem it appropriate to restore the matter to the file of the learned Assessing Officer for a fresh determination confined to the limited purpose of verifying whether the gross turnover of the assessee during the relevant financial year was within the statutory threshold of Rs. 50 crores. The Assessing officer may also examine the nature of deposits as Abhyudaya Co-operative Bank Ltd Dahisar Branch 10 & 1811/MUM/2025 excluded u/s 194A(3)(viia) of the Act. Subject to such verification, appropriate relief be granted in accordance with law.
6.4 In view thereof, Ground No. 1 raised in the appeal by the assessee stands allowed for statistical purposes.
The ground No. 2 has been raised as an alternative to the ground No. 1. Since ground No.1 is already been allowed for statistical purposes, therefore we are not required to adjudicate the ground No. 2 of the appeal of the assessee.
8. In other appeals also identical issue has been raised except the quantum of tax liability raised u/s 201(1)/201(1A) of the Act in respect of the other branches of the assessee. As issue-in-dispute being identical, those appeals of the assessee are accordingly also allowed for statistical purposes.
In the result, all the appeals of the assessee are allowed for statistical purposes.
Order pronounced in the open Court on 30/06/2025.